* ECB policy easing expectations soothe market nerves
* German inflation reading in focus
By John Geddie
LONDON, June 2 Portugal's bond yields rose on
Monday after its supreme court rejected several austerity
measures in the government's 2014 budget.
Ten-year yields opened 7 basis higher at 3.72
percent, before paring some of those losses with the broader
debt market underpinned by expectations the European Central
Bank will announce a stimulus package on Thursday.
"It's a disturbance to the market, a reminder that it is not
so easy to get these countries back on track," said Luca
Jellinek, European head of fixed income at Credit Agricole.
Portugal, which needs to sharply cut its budget deficit in
coming years under European Union agreement, has been forced to
review its finances a number of times in the past years
following interventions from its top court.
The latest ruling announced after markets closed on Friday
creates an estimated fiscal gap of 700 million euros.
Traders said, however, that weakness in Portugal's debt
should be short-lived with the ECB poised to announce a number
of policy measures at its June meeting on Thursday designed to
protect the euro zone's fragile recovery.
"Investors will use any weakness as an opportunity to buy,"
said one euro zone government bond trader.
The package of measures is expected to include an
unprecedented cut in the ECB's deposit rate into negative
territory and measures aimed at boosting lending to small and
mid-sized firms (SMEs).
Anticipation of these measures has kept borrowing costs in
some of the euro zone's most fragile states down. Yields on
Italian and Spanish 10-year bonds dipped 1 bps to 2.96
and 2.85 percent respectively on
Monday, just above record lows.
With ECB policymakers closely focused on stubbornly low
inflation in the euro zone, the preliminary reading of German
CPI later on Monday will be of added importance ahead of euro
wide data later this week.
Italian Economy Minister Pier Carlo Padoan said on Saturday
that deflation would be a disaster for the euro zone and for
countries with high public debt in particular.
Euro zone inflation stood at just 0.7 percent in April, far
below the European Central Bank's (ECB) target of just below 2
percent, and is expected to remain at the same level in May
according to a Reuters survey of analysts.
(Reporting by John Geddie; Editing by John Stonestreet)